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8-K - FORM 8-K - AVNET INC | c16139e8vk.htm |
EX-99.1 - EXHIBIT 99.1 - AVNET INC | c16139exv99w1.htm |
Exhibit 99.2
CFO Review of Fiscal 2011 Third Quarter Results
Revenue
Year-over-Year Growth Rates | ||||||||||||
Q3 FY11 | Reported | Pro forma | ||||||||||
Revenue | Revenue(1) | Revenue(2) | ||||||||||
($ in millions) | ||||||||||||
Avnet, Inc |
$ | 6,672.4 | 40.3 | % | 16.2 | % | ||||||
Excluding FX (1) |
39.5 | % | 15.5 | % | ||||||||
Electronics Marketing Total |
$ | 3,925.2 | 36.0 | % | 18.3 | % | ||||||
Excluding FX (1) |
35.6 | % | 18.0 | % | ||||||||
Americas |
$ | 1,316.2 | 46.7 | % | 11.3 | % | ||||||
EMEA |
$ | 1,328.5 | 30.3 | % | | |||||||
Excluding FX (1) |
30.5 | % | | |||||||||
Asia |
$ | 1,280.5 | 32.1 | % | 14.8 | % | ||||||
Technology Solutions Total |
$ | 2,747.2 | 46.9 | % | 13.2 | % | ||||||
Excluding FX (1) |
45.4 | % | 12.1 | % | ||||||||
Americas |
$ | 1,506.6 | 38.9 | % | 20.4 | % | ||||||
EMEA |
$ | 847.0 | 59.5 | % | -2.9 | % | ||||||
Excluding FX (1) |
57.8 | % | -3.9 | % | ||||||||
Asia |
$ | 393.6 | 54.8 | % | 30.0 | % |
(1) | Year-over-year revenue growth rate excluding the impact of changes in foreign currency
exchange rates. |
|
(2) | Pro forma revenue as defined in this document. Pro forma growth rates are not presented for
EM EMEA as revenue comparisons to prior year were not impacted by acquisitions. |
| Avnet, Inc. sales of $6.7 billion, increased 40% year over year (39% excluding the
impact of changes in foreign currency exchange rates constant dollars), representing
the sixth consecutive quarter of double-digit, year-over-year growth. |
| On a sequential basis, sales decreased 1.4% (1.8% in constant dollars);
better than the typical seasonal decline of down 4% to 7%. |
| Year-over-year pro forma sales increased 16% (15% in constant dollars),
representing the fifth consecutive quarter of double-digit, year-over-year growth in
pro forma sales. |
| Electronics Marketing (EM) achieved record quarterly revenue of $3.93 billion, a
year-over-year increase of 36% in both reported and constant dollars, representing the
sixth consecutive quarter of double-digit, year-over-year growth. |
| Pro forma year-over-year revenue growth was 18% and was strongest in the
EMEA region due to high demand in the industrial and automotive markets. |
| Pro forma revenue increased 10% sequentially which was above the typical
seasonal increase of 4% to 7% with all regions contributing. |
| The book to bill ratio was above 1:1 at the end of the quarter,
representing the eighth consecutive quarter at parity or better. |
| Technology Solutions (TS) revenue grew 47% year over year (45% in constant dollars) to
$2.7 billion. |
| Pro forma revenue grew 13% year over year (12% in constant dollars)
driven by significant growth in Asia and the Americas. |
| Pro forma revenue declined 12% sequentially in both reported and constant
dollars; better than the typical seasonal decline of 16% to 20% driven by increased
sales of servers and storage. |
Avnet, Inc. Gross Profit
Three Months Ended | ||||||||||||
April 2, | April 3, | |||||||||||
2011 | 2010 | Change | ||||||||||
($ in millions) | ||||||||||||
Gross Profit |
$ | 786.6 | $ | 582.8 | $ | 203.8 | ||||||
Gross Profit Margin |
11.79 | % | 12.25 | % | -46 | bps |
| Gross profit dollars were $787 million, up 35% year over year and 2% sequentially. |
| Gross profit margin of 11.8% increased 36 basis points sequentially
driven by a larger mix of products from the higher margin EM business which is
typical following the seasonally strong December quarter for TS. Gross profit
margin declined 46 basis points year over year primarily due to the impact of the
lower gross profit margin product mix of businesses acquired. |
| EM gross profit margin increased 22 basis points sequentially and
declined 10 basis points year over year. This is the second quarter in a row that
EM continued to strengthen the gross profit margin in its core components business.
The year-over-year decline is primarily due to the addition of the relatively lower
gross profit margin but higher working capital velocity embedded business acquired
from Bell Micro and the embedded business transferred from TS at the beginning of
this fiscal year. Excluding the impact of the embedded businesses, gross profit
margin in the EM core components business increased approximately 30 basis points
year over year. |
| TS gross profit margin was down 17 basis points sequentially and 78 basis
points year over year. The sequential decline was driven primarily by the impact of
New ProSys Corp. (ProSys), which was divested at the beginning of the quarter, and
product mix. Excluding ProSys, TS gross profit margin was down 6 basis points. The
year-over-year decline was primarily due to the impact of the acquisition of Bell
Micro, which had a higher mix of lower gross profit margin but higher working
capital velocity products. |
Avnet, Inc. Operating Expenses
Three Months Ended | ||||||||||||
April 2, | April 3, | |||||||||||
2011 | 2010 | Change | ||||||||||
($ in millions) | ||||||||||||
Selling, General and Administrative Expenses |
$ | 529.6 | $ | 408.2 | $ | 121.4 | ||||||
Selling, General and Administrative Expenses as % of Gross Profit |
67.33 | % | 70.05 | % | -272 | bps | ||||||
Selling, General and Administrative Expenses as % of Sales |
7.94 | % | 8.58 | % | -64 | bps |
| Selling, general and administrative expenses (SG&A expenses) were $530 million, up 30%
year over year and up 9% in constant dollars. |
| The $121 million year-over-year increase in SG&A expenses consisted of
approximately $74 million of additional expense associated with acquired businesses,
$44 million to support higher revenue, and $3 million due to the translation impact
of changes in foreign currency exchange rates. |
| SG&A expenses as a percentage of gross profit improved by 272 basis points over the
prior year third quarter and declined 53 basis points sequentially. |
| This year-over-year improvement reflects the significant leverage in the
business model as management continues to optimize productivity and becomes
increasingly more efficient. |
| For EM, SG&A expenses as a percentage of gross profit improved 351 basis
points sequentially to the lowest level in over a decade. |
2
Operating Income
April 2, | April 3, | |||||||||||
2011 | 2010 | Change | ||||||||||
($ in millions) | ||||||||||||
GAAP Operating Income |
$ | 240.7 | $ | 167.2 | $ | 73.5 | ||||||
GAAP Operating Income Margin |
3.61 | % | 3.52 | % | 9 | bps | ||||||
Adjusted Operating Income (1) |
$ | 257.0 | $ | 174.6 | $ | 82.4 | ||||||
Adjusted Operating Income Margin (1) |
3.85 | % | 3.67 | % | 18 | bps | ||||||
Electronics Marketing |
||||||||||||
Operating Income |
$ | 224.8 | $ | 144.2 | $ | 80.6 | ||||||
Operating Income Margin |
5.73 | % | 5.00 | % | 73 | bps | ||||||
Technology Solutions |
||||||||||||
Operating Income |
$ | 57.3 | $ | 49.9 | $ | 7.4 | ||||||
Operating Income Margin |
2.09 | % | 2.67 | % | -58 | bps |
(1) | A reconciliation of GAAP to non-GAAP financial measures is presented in the Non-GAAP
Financial Information section at the end of this document. |
| Adjusted enterprise operating income of $257 million was up 47% as compared with the
year ago quarter and roughly flat sequentially. |
| EMs operating income increased 56% over the prior year third quarter and
23% sequentially due to an increase in sales and the associated gross profit
dollars, improvement in gross profit margin and continued effective expense
management. |
| TS operating income increased 15% year over year due primarily to the
impact of acquisitions. The sequential decline of 46% was primarily driven by the
typical seasonal decline in revenue and a higher mix of lower margin but higher
working capital velocity products. |
| Adjusted operating income margin at the enterprise level of 3.85% was up 18 basis points
over the prior year quarter and 6 basis points sequentially and represents the fifth
consecutive quarter of year-over- year improvement. |
| The year-over-year increase in margin is attributable to operating
leverage on the increase in sales due to continued effective expense management and
firming gross profit margins in the EM core component business, somewhat offset by
the impact of acquisitions with lower gross profit margin profiles. |
| EM operating income margin increased 73 basis points year over year and
57 basis points sequentially to 5.73%. The improvement was driven primarily by the
operating leverage in the Western regions, particularly EMEA. |
| TS operating income margin decreased 58 basis points year over year and
119 basis points sequentially. The year-over-year decrease was due primarily to the
impact of the acquisition of Bell Micro, which had a higher mix of lower margin but
higher working capital velocity products. The sequential decrease was worse than
seasonal due primarily to product mix and, to a lesser extent, the impact of ProSys
which was divested at the beginning of the quarter. The TS operating income margin
is expected to improve as additional synergies are realized and value-based
management principles are applied. |
3
Avnet, Inc. Interest Expense, Other Income and Income Taxes
Three Months Ended | ||||||||||||
April 2, | April 3, | |||||||||||
2011 | 2010 | Change | ||||||||||
($ in millions) | ||||||||||||
Interest Expense |
$ | (23.6 | ) | $ | (15.3 | ) | $ | (8.2 | ) | |||
Other Income |
$ | 2.3 | $ | 1.5 | $ | 0.8 | ||||||
GAAP Income Taxes |
$ | 62.1 | $ | 42.1 | $ | 20.0 | ||||||
Adjusted Income Taxes (1) |
$ | 66.0 | $ | 44.9 | $ | 21.1 | ||||||
GAAP Effective Tax Rate |
29.2 | % | 26.9 | % | 227 | bps | ||||||
Adjusted Effective Tax Rate (1) |
28.0 | % | 28.0 | % | 4 | bps |
(1) | A reconciliation of GAAP to non-GAAP financial measures is presented in the Non-GAAP
Financial Information section at the end of this document. |
| Interest expense for the March 2011 quarter was $24 million, up $8.2 million over the
prior year quarter primarily due to the increase in debt used to fund the acquisitions of
businesses and the increase in working capital to support the significant growth in sales. |
Avnet, Inc. Net Income
Three Months Ended | ||||||||||||
April 2, | April 3, | |||||||||||
2011 | 2010 | Change | ||||||||||
($ in millions, except per share data) | ||||||||||||
GAAP Net Income |
$ | 151.0 | $ | 114.5 | $ | 36.5 | ||||||
Adjusted Net Income (1) |
$ | 169.7 | $ | 115.8 | $ | 53.9 | ||||||
GAAP Diluted EPS |
$ | 0.98 | $ | 0.75 | $ | 0.23 | ||||||
Adjusted Diluted EPS (1) |
$ | 1.10 | $ | 0.76 | $ | 0.34 |
(1) | A reconciliation of GAAP to non-GAAP financial measures is presented in the Non-GAAP
Financial Information section at the end of this document. |
| Adjusted net income for the quarter was $170 million, or $1.10 per share on a diluted
basis, an increase in adjusted net income of 47% year over year. |
| GAAP net income includes $22.6 million pre-tax, $18.7 million after tax and $0.12 per
share on a diluted basis for restructuring, integration and other items (see Non-GAAP
Financial Information). |
| This is the fourth consecutive quarter of record adjusted earnings per share. |
4
Avnet, Inc. Balance Sheet Returns
Three Months Ended | ||||||||||||
April 2, | April 3, | Net | ||||||||||
2011 | 2010 | Change | ||||||||||
Return on Working Capital (ROWC) (1) |
26.45 | % | 27.04 | % | -59 | bps | ||||||
Return on Capital Employed (ROCE) (1) |
14.90 | % | 14.97 | % | -7 | bps | ||||||
Working Capital Velocity (1) |
6.87 | 7.37 | -0.50 |
(1) | A reconciliation of GAAP to non-GAAP financial measures is presented in the Non-GAAP
Financial Information section at the end of this document. |
| Return on working capital (ROWC) for the quarter was 26.5%, a decrease of 59 basis
points year over year and 129 basis points sequentially. |
| The year-over-year decline is primarily due to the impact of acquisitions
as the full benefits from expected synergies and the application of value-based
management principles have not yet been realized. |
| This sequential decline is primarily attributable to the typical seasonal
decline in revenue for TS. |
| Although return on capital employed (ROCE) for the quarter of 14.9% was down slightly
over the year ago quarter, it continued to be within our stated target range of 14% to 16%
for the sixth consecutive quarter despite the short-term impact of significant acquisitions
for which the full benefits have not yet been realized. |
| ROCE declined 79 basis points sequentially primarily due to the impact of
the typical seasonal decline experienced by TS. |
| Working capital (receivables plus inventory less accounts payable) was up only 1%
sequentially on a pro forma basis in constant dollars, despite strong growth in the higher
working capital intensive EM business. |
| Working capital velocity declined 0.50 when compared with the year ago quarter and 0.44
sequentially to 6.87, remaining above pre-recession levels even as we return to a more
normalized level of demand. |
| Prior year quarter compares were elevated due to product shortages and
extended lead times as the industry worked to replenish supply during the recovery. |
| The sequential decline was due to a change in business mix as the higher
working capital velocity TS business comes off of its seasonally strong December
quarter. |
| Cash generated from operations was $188 million for the quarter and $121 million for the
last four quarters driven by strong profits and effective working capital management. |
| Cash and cash equivalents at the end of the quarter was $782 million; net debt (total
debt less cash and cash equivalents) was $1.1 billion. |
5
Risk Factors
The discussion of Avnets business and operations should be read together with the risk factors
contained in Item 1A of its 2010 Annual Report on Form 10-K, filed with the Securities and Exchange
Commission, which describe various risks and uncertainties to which the Company is or may become
subject. These risks and uncertainties have the potential to affect Avnets business, financial
condition, results of operations, cash flows, strategies or prospects in a material and adverse
manner.
Non-GAAP Financial Information
In addition to disclosing financial results that are determined in accordance with generally
accepted accounting principles in the United States (GAAP), the Company also discloses in this
document certain non-GAAP financial information including adjusted operating income, adjusted net
income and adjusted diluted earnings per share, as well as revenue adjusted for the impact of
acquisitions and other items (as defined in the Pro Forma (Organic) Revenue section of this
release). Management believes pro forma revenue is a useful measure for evaluating current period
performance as compared with prior periods and for understanding underlying trends.
Management believes that operating income adjusted for restructuring, integration and other items
is a useful measure to help investors better assess and understand the Companys operating
performance, especially when comparing results with previous periods or forecasting performance for
future periods, primarily because management views the excluded items to be outside of Avnets
normal operating results. Management analyzes operating income without the impact of these items
as an indicator of ongoing margin performance and underlying trends in the business. Management
also uses these non-GAAP measures to establish operational goals and, in some cases, for measuring
performance for compensation purposes.
Management believes net income and EPS adjusted for the impact of the items described above is
useful to investors because it provides a measure of the Companys net profitability on a more
comparable basis to historical periods and provides a more meaningful basis for forecasting future
performance. Additionally, because of managements focus on generating shareholder value, of which
net profitability is a primary driver, management believes net income and EPS excluding the impact
of these items provides an important measure of the Companys net results of operations for the
investing public.
Other metrics management monitors in its assessment of business performance include return on
working capital (ROWC), return on capital employed (ROCE) and working capital velocity.
| ROWC is defined as annualized operating income, excluding restructuring,
integration and other items, divided by the sum of the monthly average balances of
receivables and inventory less accounts payable. |
| Working capital velocity (WC velocity) is defined as annualized sales divided
by the sum of the monthly average balances of accounts receivable and inventory less
accounts payable. |
| ROCE is defined as annualized tax affected operating income, excluding
restructuring, integration and other items, divided by the monthly average balances of
interest-bearing debt and equity less cash and cash equivalents (average capital). |
However, analysis of results and outlook on a non-GAAP basis should be used as a complement to, and
in conjunction with, data presented in accordance with GAAP.
6
Third Quarter Fiscal 2011
Third Quarter Ended Fiscal 2011 | ||||||||||||||||
Diluted | ||||||||||||||||
Op Income | Pre-tax | Net Income | EPS | |||||||||||||
$ in thousands, except per share data | ||||||||||||||||
GAAP results |
$ | 240,737 | $ | 213,161 | $ | 151,031 | $ | 0.98 | ||||||||
Restructuring, integration and other charges |
16,273 | 16,273 | 11,887 | 0.08 | ||||||||||||
Loss on investments |
| 6,308 | 3,857 | 0.02 | ||||||||||||
Income tax adjustments |
| | 2,959 | 0.02 | ||||||||||||
Total adjustments |
16,273 | 22,581 | 18,703 | 0.12 | ||||||||||||
Adjusted results |
$ | 257,010 | $ | 235,742 | $ | 169,734 | $ | 1.10 | ||||||||
Items impacting the third quarter of fiscal 2011 consisted of the following:
| Restructuring, integration and other charges of $16.3 million pre-tax which were incurred
primarily in connection with the acquisition and integration of acquired businesses and
consisted of $4.4 million pre-tax for severance, $3.3 million pre-tax for facility exit
related costs, fixed asset write downs and other related charges, $8.0 million pre-tax for
integration-related costs, $3.5 million pre-tax for transaction costs associated with
acquisitions, $0.9 million pre-tax for other charges, and a reversal of $3.8 million pre-tax
to release liabilities associated with a prior acquisition and to adjust prior year
restructuring reserves no longer needed; |
| Loss on investments of $6.3 million pre-tax related to the write down of investments in
smaller technology start-up companies; and |
| Income tax adjustments of $3.0 million primarily related to uncertainty surrounding
deferred tax assets, additional transfer pricing exposure and audit settlements. |
Third Quarter Fiscal 2010
Third Quarter Ended Fiscal 2010 | ||||||||||||||||
Diluted | ||||||||||||||||
Op Income | Pre-tax | Net Income | EPS | |||||||||||||
$ in thousands, except per share data | ||||||||||||||||
GAAP results |
$ | 167,220 | $ | 156,594 | $ | 114,505 | $ | 0.75 | ||||||||
Restructuring, integration and other charges |
7,347 | 7,347 | 5,587 | 0.04 | ||||||||||||
Gain on sale of assets |
| (3,202 | ) | (1,987 | ) | (0.01 | ) | |||||||||
Net tax benefit |
| | (2,303 | ) | (0.02 | ) | ||||||||||
Total adjustments |
7,347 | 4,145 | 1,297 | 0.01 | ||||||||||||
Adjusted results |
$ | 174,567 | $ | 160,739 | $ | 115,802 | 0.76 | |||||||||
Items impacting third quarter of fiscal 2010 consisted of the following:
| Restructuring, integration and other charges of $7.3 million pre-tax which included
(i) $6.5 million pre-tax for a value-added tax exposure in Europe related to an audit
of prior years, (ii) $2.1 million pre-tax related to acquisition-related costs, and
(iii) a credit of $1.3 million pre-tax related to reversals of restructuring reserves
no longer deemed necessary. |
| A gain on the sale of assets of $3.2 million pre-tax as a result of a final earn-out
payment associated with the earlier sale of the Companys equity investment in Calence
LLC. |
| A net tax benefit of $2.3 million related to adjustments for a prior year tax return
and a benefit from a favorable income tax audit settlement partially offset by
additional tax reserves for existing tax positions. |
7
Pro Forma (Organic) Revenue
Pro forma or Organic revenue is defined as reported revenue adjusted for (i) the impact of
acquisitions by adjusting Avnets prior periods to include the sales of businesses acquired as if
the acquisitions had occurred at the beginning of fiscal 2010; (ii) the impact of a divestiture by
adjusting Avnets prior periods to exclude the sales of the business divested as if the divestiture
had occurred at the beginning of the period presented; (iii) the impact of the extra week of sales
in the prior year first quarter due to the 52/53 week fiscal year; and (iv) the impact of the
transfer of the existing embedded business from TS Americas to EM Americas that occurred in the
first quarter of fiscal 2011, which did not have an impact to Avnet on a consolidated basis but did
impact the pro forma sales for the groups by $97 million in the third quarter of fiscal 2010.
Sales taking into account the combination of these adjustments is referred to as pro forma sales
or organic sales.
Revenue adjusted for this impact is presented in the following table:
Acquisition / | ||||||||||||||||
Revenue | Divested | Extra Week | Pro forma | |||||||||||||
as Reported | Revenue | in Q1 FY10 | Revenue | |||||||||||||
(in thousands) | ||||||||||||||||
Q1 Fiscal 2011 |
$ | 6,182,388 | $ | (41,261 | ) | $ | | $ | 6,141,127 | |||||||
Q2 Fiscal 2011 |
$ | 6,767,495 | $ | (102,385 | ) | $ | | $ | 6,665,110 | |||||||
Q3 Fiscal 2011 |
$ | 6,672,404 | $ | | $ | 6,672,404 | ||||||||||
Fiscal year 2011 |
$ | 19,622,287 | $ | (143,646 | ) | $ | | $ | 19,478,641 | |||||||
Q1 Fiscal 2010 |
$ | 4,355,036 | $ | 884,224 | $ | (417,780 | ) | $ | 4,821,480 | |||||||
Q2 Fiscal 2010 |
4,834,524 | 1,043,732 | | 5,878,256 | ||||||||||||
Q3 Fiscal 2010 |
4,756,786 | 987,295 | | 5,744,081 | ||||||||||||
Q4 Fiscal 2010 |
5,213,826 | 878,290 | | 6,092,116 | ||||||||||||
Fiscal year 2010 |
$ | 19,160,172 | $ | 3,793,541 | $ | (417,780 | ) | $ | 22,535,933 | |||||||
Acquisition Revenue as presented in the preceding table includes the following acquisitions:
Acquired Business | Operating Group | Acquisition Date | ||
Vanda Group |
TS | October 2009 | ||
Sunshine Joint Stock Company |
TS | November 2009 | ||
PT Datamation |
TS | April 2010 | ||
Servodata HP Division |
TS | April 2010 | ||
Bell Micro Products Inc. |
EM/TS | July 2010 | ||
Tallard Technologies |
TS | July 2010 | ||
Unidux |
EM | July 2010 | ||
Broadband |
EM | October 2010 | ||
Eurotone |
EM | October 2010 | ||
Center Cell |
EM | November 2010 | ||
itX Technologies |
TS | January 2011 |
The table above also reflects the divestiture of New ProSys Corp. which occurred in January 2011.
8
The following table presents the calculation for ROWC, WC velocity and ROCE. The reconciliation to
the nearest GAAP metric is either presented below or in a prior table in this Non-GAAP Information
section.
Q3 FY 11 | Q3 FY 10 | |||||||
Sales |
6,672,404 | 4,756,786 | ||||||
Sales, annualized (a) |
26,689,616 | 19,027,144 | ||||||
Adjusted operating income (1) |
257,010 | 174,567 | ||||||
Adjusted operating income, annualized (b) |
1,028,040 | 698,268 | ||||||
Adjusted effective tax rate (2) |
28.95 | % | 29.43 | % | ||||
Adjusted operating income, net after tax (c) |
730,422 | 492,768 | ||||||
Average monthly working capital (3) |
||||||||
Accounts receivable |
4,588,626 | 3,242,165 | ||||||
Inventory |
2,587,019 | 1,734,564 | ||||||
Accounts payable |
(3,288,341 | ) | (2,394,811 | ) | ||||
Average working capital (d) |
3,887,304 | 2,581,918 | ||||||
Average monthly total capital (3) (e) |
4,903,072 | 3,291,719 | ||||||
ROWC = (b) / (d) |
26.45 | % | 27.04 | % | ||||
WC Velocity = (a) / (d) |
6.87 | 7.37 | ||||||
ROCE = (c ) / (e) |
14.90 | % | 14.97 | % |
(1) | See reconciliation to GAAP amounts in the preceding tables in this Non-GAAP Financial
Information Section. |
|
(2) | Adjusted effective tax rate is based upon a year-to-date calculation excluding restructuring,
integration and other charges. |
|
(3) | For averaging purposes, the working capital and total capital for Bell Micro was included as
of the beginning of fiscal 2011. |
9